In-class quiz
IB1
17.Oct’13.
1. The best definition of PED is
a. Change in price over change in quantity
b. Relative change in quantity over relative change in price
c. Relative change in quantity demanded over relative change in price
d. Relative change in price over relative change in quantity demanded
e. None of the above
2. High PED values indicate
a. The good has many substitutes
b. The price might constitute a small proportion of income
c. The good has few substitutes
d. Income has fallen
e. The time span might be very short
f. All the above
3. A tax on a good will
a. Decrease demand
b. Shift the supply curve to the right
c. Increase supply
d. Shift the s-curve up
e. Shift the S-curve left
f. b. and c.
g. c. and d.
h. d. and e.
4. THINK! The good illustrated below is
a. Inelastic, because the price increases more than the Qd falls
b. Elastic, because the price increases more than the Qd falls
c. Inelastic, because the Qd increases more than the P falls
d. Inelastic, because the price increases less than the Qd falls
e. None of the above
P ($)
P1
P0
Q1 Q0
Da
Q/t
5. Primary goods and commodities will frequently
a. Be rather insensitive in demand to a change in price
b. Have a low PED
c. See that the % change in Qd will be less than the % change in P
d. See that prices will fluctuate greatly over time
e. All the above
f. None of the above
6. The main determinants of PED are
a. The price of the good
b. The price of a substitute good
c. The amount of money spent on the good
d. The change in demand caused by the price
e. All the above
f. None of the above
7. A value of -3 is greater than -1.5 in reference to PED because
a. The demand changed more than the price
b. The quantity demanded changed more than the price
c. The percentage change in Qd is greater than the % change in P
d. Demand shifts more than price changes
e. No, -3 is less than -1.5
f. None of the above
8. PED along a linear demand curve intercepting the P and Q-axes, will
a. Have PED going from zero on P-axis to -1 on Q-axis
b. Have PED going from -1 on P-axis to infinity on Q-axis
c. Have PED going from infinity on P-axis to zero on Q-axis
Da
Q1 Q0
d.
e.
f.
g.
Have PED going from zero on P-axis to infinity on Q-axis
Have PED at unitary on P-axis
Have PED at unitary on Q-axis
None of the above
9. If the price of Coke rises,
a. We can expect the demand for Pepsi to rise
b. There will be positive CPED (cross price elasticity of demand)
c. There will be an increase in the demand for substitutes
d. All the above
e. None of the above
10. A CPED value of -3.5 tells us that
a. The two goods are substitutes
b. The two goods are very close substitutes
c. The goods are strong complements
d. A rise in the P good X will cause an increase in Qd for good Y
e. When the demand for good X rises, the demand for good Y rises more
f. None of the above
Friday afternoon…
1. A good has an elasticity value of -3. This could mean
a. That the good has many substitutes
b. That there is a close complement involved
c. That the time span is short
d. a. and b.
e. b. and c.
f. all the above
g. none of the above
2. Demand for tourism in China would show negative CPED with
a. The exchange rate for the RMB
b. The price of hotel rooms in China
c. The rate of inflation in China
d. b. and c.
e. all the above
3. The diagram shows two curves
a. Red is a complement
b. Green is a substitute
c. Red is a substitute
d. Green is inelastic
e. Red is elastic
f. None of the above
P of X
4.
5.
Qd for Y
Fri 25 Oct – 10p quiz on elasticities – Jane’s class
1. Define PES and exemplify a good which has low PES. (2p)
2. Explain, using a diagram, why prices for coffee beans (= raw coffee from the bush)
might fluctuate a lot over a few years. (2p for diag, 2p for expl)
3. Explain, using a diag, how wheat rust (disease that kills wheat plants) might affect
the price of bread. (2p for diag, 2p for expl).
Correctives
1. Define PES and exemplify a good which has low PES. (2p)
Def: PES is the REL ΔQs due to a REL ΔP, or “…percentage in responsiveness to Qs
over percentage change in the price…”. (1p)
Fresh goods (strawberries) that are not storable have low PES. Most commodities
or primary goods have low PES. (1p)
2. Explain, using a diagram, why prices for coffee beans (= raw coffee from the bush)
might fluctuate a lot over a few years. (2p for diag, 2p for expl)
Coffee beans have low PED and low PES, (1p for either)
Expl that a “bad season” or storm would affect S and thus low PED would cause P
to change a lot, (1p)
…or: change in D…along inelastic S-curve….will cause a large change in P…
Correct diag showing fluctuations and ΔP on P-axis (2p)
3. Explain, using a diag, how wheat rust (disease that kills wheat plants) might affect
the price of bread. (2p for diag, 2p for expl).
Wheat is a FoP (raw material) used in bread (1p)
Wheat rust will cause Δ↓S of wheat…and of course a rise in the price of wheat
(1p)
Poss but NOT necessary to use a diag for wheat (showing decrease in S)
Diagram showing decrease in S of bread and thus higher price (2p)
Quiz – elasticities, Cristina’s class
1. Define CPED. (2p)
 Correct formula only 1p
 “…change in Qd of X…change in price of Y…” 1p
 “…change in Qd of X…change in price of Y…” plus correct
formula, 2p
 “…rel change in Qd of X due to rel change in Py…” full marks
2. Explain, using a diagram, why goods with low PED tend to be targeted by
governments for taxation. (2p for diag, 2p for expl)
 Def of PED, 1
 Def of PED and also Linking PED to TR for govt, i.e. explaining
that Qd does not change much as the P (in percentages) so the
tax revenue is higher than for price elastic goods 2p
 Correct diag showing inelastic D-curve, decrease in S, 1p
 As above but showing TR, 2p
3. Explain, using a diagram, how increased price of car insurance might affect the
price of cars. (2p for diag, 2p for expl)
 For stating that the two goods are complements, 1p
 For stating that the two goods have negative CPED, 1p
 For stating any ONE of the above and also that an increase in
Pinsurance → ↓Dcars, 2p
 Clear diag showing decrease in D for cars, 1p
 As above but clearly showing that the price of cars falls, 2p
Quiz – elasticities, Sara’s class
1. Define “inferior good”. (2p)
2. Explain, using a diagram, why goods with a PED ˃ │1│ are unsuitable for
taxation if government is trying to maximise tax revenues. (2p for diag, 2p for
expl)
3. Explain, using a diagram, why an increase in the price of car ownership might lead
to an increase in the price of public transportation. (2p for diag, 2p for expl)
END: 14:10
1. Define “inferior good”. (2p)
 Correct formula for yED only 1p

“…decrease in Qd due to increase in y…” 1p…or…use of formula
to state that “…yED will be negative…”

“…decrease in Qd of X…due to increased y…” plus correct
formula, 2p
2. Explain, using a diagram, why goods with a PED ˃ │1│ are unsuitable for
taxation if government is trying to maximise tax revenues. (2p for diag, 2p for
expl)
 Def of PED…OR…formula, 1
 Def of PED and also Linking PED to TR for govt, i.e. explaining
that the relative Qd decreases far more the relative change in P
(in percentages) so the tax revenue is lower than for price
inelastic goods 2p
 Correct diag showing elastic D-curve, decrease in S, 1p
 As above and also showing TR, 2p
3. Explain, using a diagram, why an increase in the price of car ownership might
lead to an increase in the price of public transportation. (2p for diag, 2p for
expl)
 For stating that the two goods are substitutes, 1p….
a. ….OR… stating that the two goods have positive
CPED, 1p


For stating any ONE of the above PLUS that an increase in P of
car ownership → ↑D public transportation, 2p
Clear diag showing increase in D for public transportation, 1p
a. The above PLUS clearly showing that the price of
public transportation rises, 2p
Fri 21 Nov; Trial run quiz (preparing for End of Term Test)
1. Explain why a minimum (floor) price might not lead to
increased equity. (10 min)
2. Explain how maximum and administered prices might
lead to black markets (10p)
3. Using core economic concepts and a diagram, evaluate
the possible outcomes of a maximum price on a good.
(10p)
4. Using a diagram, explain why government’s intention to
create better living standards for workers by way of
implementing a minimum wage might in fact not work.
(10p)
End: 08:50
End
Mon 2 Dec – Cristina’s
10 marks, 20 minutes
a. Define subsidy (2p)
b. Using a suitable diagram, explain one effect and one additional
government response to a maximum price. (4p)
c. Evaluate the effects of a maximum price on firms and households. (4p)
End: 08:27
Correctives
a. Define subsidy (2p)
 Money gift/grant to producers…(1p)
 Lowers costs for producers…(1p)
 Increases supply…shifts S-curve right/down…(1p)
b. Using a suitable diagram, explain one effect and one additional
government response to a maximum price. (4p)
 Diag with P…Q…equil…Pmax….XS demand….(2p)
 Expl that D ˃ S and excess, (1p)
 Rationing or queue system (to deal with the XS D)…(1p)
 Expl that at Qs there is a potential parallel mkt…(1p)
c. Evaluate the effects of a maximum price on firms and households. (4p)
 HHs will have less available on mkt…(1p)
 HHs see a change of CS (link to diag!)…(1p)
 Potential BM…re-selling of goods purchased at Pmax and then
the possible P on BM (link to diag)…(2p)
 Firms see TR fall (link to areas/figures in diag)….(1p)
 Firms see PS fall (link…)…(1p)
 Other: possible side-effects of BM such as other illegal
goods…organised crime…
Mon 2 Dec – Sara’s
10 marks, 20 minutes
a. Define ad valorem tax (2p)
b. Using a suitable diagram, explain one effect and one additional
government response to a minimum price. (4p)
c. Evaluate the effects of a minimum price on firms and households.
(4p)
End 14:07
Correctives
a. Define ad valorem tax (2p)
i. Tax on expenditure…(1p)
ii. Percentage-based on sales value…(1p)
b. Using a suitable diagram, explain one effect and one additional government
response to a minimum price. (4p – max 3 if there are no links to diag!!!)
i. Diag with P…Q…equil…Pmin….XS supply….(2p)
ii. Expl that at Pmin, D ˂ S and resulting excess supply, (1p)
iii. Govt repurchase scheme, or buy-back (to deal with the XS S)…(1p)
iv. Govt must deal with the excess…(1p)
c. Evaluate the effects of a minimum price on firms and households. (4p)
i. HHs will pay more and consume less of the good…(1p)
ii. HHs see a decrease in CS (1p)
iii. Firms see TR increase (link to areas/figures in diag)….OR…firms’ PS
increases (1p)
iv. For comments to the effect that any Pmin scheme involving a
repurchasing scheme will cost taxpayer monies (1p)
v. For explanation that if this economy dumps the excess on the
world market, firms and markets in other countries will suffer
from the consequences (1p)
Tue 3 Dec – Jane’s
10 marks, 20 minutes
a. Define subsidy. (2p)
b. Using a suitable diagram, explain why government attempts to
increase available housing via maximum rent might not work. (4p)
c. Evaluate ways in which government might try to solve the
problems arising due to a maximum rent. (4p)
End 10:22
Correctives
a. Define subsidy. (2p)
 Money from govt to firms…, 1p
 Money gift/grandt…lowers costs OR ↑incentives and increases
supply…2p
b. Using a suitable diagram, explain why government attempts to
increase available housing via maximum rent might not work. (4p)
 Correct and complete diag (P, Q, Pmax, excess demand…etc), 2p
 Clear expl that Qs ˂ Qd and thus an excess demand, 2p
 Max 3 marks total if there is no clear reference in the text to the
diag!
c. Evaluate ways in which government might try to solve the
problems arising due to a maximum rent. (4p)
 Up to 2p for outlining issues
1. Discussion (and reference to diag) of possible parallel
market, 1p
2. Need to deal with the XS demand – possible queue
system for apartments, 1p
3. Subsidising new buildings in the city, 1p
4. Better transport to out of city areas to decrease D on
housing in the city, 1p
5. Subsidising housing outside of city, i.e. ↓P substitutes to
↓D housing in city, 1p

Up to 2p for evaluation
1. Parallel markets are hard to control, 1p
2. Queues often mean years of waiting, 1p
3. Subsidies cost taxpayer money, 1p
4. Transportation is also costly, creates traffic, 1p
5. Lower cost housing in suburbs might not be popular,
expensive to subsidise, 1p
MCQs on ToF
27 Jan 2014
1. The best economic definition of normal profit is
a. TR – TC minus TR
b. P xQ = economic costs
c. AR = AC at Q profitmax
d. PxQ – (TFC + TVC)
e. None of above
2. If TP is rising faster, then
a. MP is falling faster
b. MP is constant
c. AP is falling at a faster rate
d. MP is rising at a faster rate
e. MP is negative
3. Study the diag below. What is wrong?
a. The ATC curve is missing
b. AVC is missing
c. AR is missing
d. All the above
e. None of the above
Fig. 2.3.12 An increase in fixed costs – the “roll” of the ATC curve
4. A profitmax firm will set Q where
a.
b.
c.
d.
e.
f.
MC = MR
AC is minimised
AR = AC
AR = P
MR is falling
AC starts to rise
5. An increase in TFC will
a. Shift MC and AC
b. Cause the AFC curve to move down
c. Change MR and thus AC
d. Have no effect on SR costs
e. None of the above
6. Profit can be seen in diags as
a. TR – opportunity costs
b. AR – MC
c. P x Q – TFC – TVC
d. (AR – ATC) x Q
e. b. and c.
f. c. and d.
g. All the above
7. A fall in the price of a variable factor for firms on a market will
a. Increase supply on the market
b. Decrease the MC for firms
c. Increase total Q produced
d. Decrease ATC
e. All the above
f. None of the above
8. TR will be maximised when
a. AR = total market demand
b. MR = total market demand
c. AR = D when PED is unitary
d. MR = D when PED is unitary
e. a. to c.
f. b. and c.
g. c. and d.
9. If TC are $50,000 and TVC are $40,000 at a Q of 100,
a. AFC are $100
b. AFC are $10
c. AVC are $100
d. AVC are $10
e. None of the above
10. Economies of scale can be obtained via
a. Two firms merging
b. Spreading TFC over more output due to increased use of capital
c. The size of the industry growing
d. Having industries making similar products “cluster” in certain regions
e. All the above
f. None of the above
Chipmunk’s
Friday 14 Feb 2014
20 minute quiz in PCM
Using a suitable diagram, explain why a PCM firm can only earn a normal profit in the
long run. (Extra marks if you can evaluate the level of efficiency in the firm!) 10 marks
Start: 08:13
End: 08:33
 Basic answer: since there is perfect knowledge/info, any firm or firms making a
loss or abnormal π (in SR) will be seen by other firms – thus market entry/exit will
take place and the resulting shift in the mkt S-curve will restore LR equil for the
individual firm at P=MR=AR=AC=MC=Dfirm.
 For correct def of “normal π”, TR = TC…and TC include implicit costs…for full
marks “economic costs” 2p
 For PCM assumptions, 2p (for less than 5 assumpt’s, 1p)
 For correctly referring to assumpt’s “no BTE” and “knowl/info” and thus mkt
entry/exit, 1p
 For correct diagr showing how abn π or loss in LR is “eaten away” by mkt
entry/exit, 5p (only 2p if ANY label is missing!)
 For explanation that loss causes firms to exit…OR…that abn π attracts mkt entry;
2p
 EXTRA: 2 marks each (sum is 4p) for correctly explaining that the PCM firm is
a. Allocatively efficient…”the cost of the last unit produced is
exactly what consumers are prepared to pay” – i.e. P = MC
b. Productively efficient…”FoPs are used maximally efficiently and
this shows in the lowest unit costs possible” – i.e. Q = ACmin
Cristina’s
Monday 17 Feb 2014
20 minute quiz in PCM
Using a suitable diagram, explain how a PCM firm might earn an abnormal profit in the
SR. 10 marks
Start: 08:25
End: 08:45
Basic answer: Put in the 5 assumptions, define abn π, explain that a PCM is a price-taker
and can only make an abn π of the SR – via a) lowering MC and/or AC via improved
technology, better production methods, lower costs…, or b) via mkt events such as
increased demand or decreased supply which drive up the mkt price and allow a SR abn π.
 Correct 5 assumptions, 2p – for less, 1p
 Def of abn π, 1p
 Correct diag showing LR normal π; AR = AC….AND Q is set where MR = MC, 2p
 For correct use of diag showing new abn π, 2p
 For clear explanation linked to points/areas in the diag, on how SR abn π is attained,
up to 3p
Sara’s
Monday 17 Feb 2014
20 minute quiz in PCM
Using a suitable diagram, explain how increasing raw material costs might cause a PCM
firm to run a loss in the SR. 10 marks
Start: 13:46
End: 14:07
Basic answer: Raw materials mean that variable costs increase…so ↑MC and AC… but
since the market P does not change neither does MR, AR… so new π-max point will yield a
loss in the SR:





Correct 4 assumptions, 2p – for less, 1p
Def of loss as AR-AC, 1p
Explanation that raw material entails a VC, 2p
Increasing VC means also that AC rise, 1p
Diag showing a situation where Q is set at MC = MR but the AC curve is above,
resulting in a loss, 4p
Chipmunks’
Wed 26 Feb 2014
20 minute quiz – mon/PCM
Explain, using a diag, why a monopoly might in fact be “better” than a PCM. 10 marks
Start: 08:07
End: 08:27
Three basic answers (at this point): 1. EoS; 2) Nat mon; 3) Setting P at BEP (municipal
utility). Any one of these, with adequate diagrammatical underpinning, can get you full
marks.





Assump’s: basic for mon, 1p; for additional such as “…no EoS…”, 1p
Correct diag, 4p
For defining “better” in terms of all efficiency, 1p; for prod eff, 1p
For clear ref to diag outlining CS increase, 2p
Additional – non-diagrammatic – arguments, e.g. abn π and R&D…creative
destruction…up to 2p
Christina’s
Thu 27 Feb 2014
20 minute quiz – mon/PCM
Explain, using a diag, why a perfectly competitive market is “better” than a monopoly.
Basic: define “better”- all/prod eff…lower cost…higher output…issues of PS/CS…DW loss.
Draw two/three diags….refer to the issues above in the diags. Conclude.
 Assump’s: for PCM…and Mon, 1 + 1p
 Def of “better”: all/prod eff, 1p, ref to DW loss, 1p
 Any sound concl…”PCM is more eff”…”higher CS”…”no all loss”…2p
 PCM diag and mon diag – side-by-side, 4p
10 marks
Start: 08:03
Sara’s
End: 08:23
Thu 27 Feb 2014
20 minute quiz – mon/PCM
Explain, using a diag, what is likely to happen if a profit-maximising monopoly instead
aims to take over a market by setting the lowest possible price without running a loss.
10 marks
Start: 13:43
End: 14:03
Basic: Define π-max (MC=MR) and BEP (Q where AR = AC), show how output increases, P
falls, π decreases…and that this is actually at a lower price and higher output than the
PCM.
 Def of π-max, 1p and def of BEP, 1p
 Clear and correct diag clearly illustrating the prices, quantities and profits, 5p
 Expl why “lowest poss price” is where AR = AC…OR reference to normal π, 2p
 Any reasonable expl of “take over” – e.g. foregoing SR π for LR, up to 2p
xx
 xxx 1p
HW check - Chipmunks' 4 Mar 2014…Sara’s/Cristina’s (5mar14)….
1. Oligopoly assumptions include
a. No BTE
b. Perfect knowl/info
c. Profit-maximiser
d. No LR abn profit
e. All the above
2. A Nash equilibrium states…
a. The situation where both parties don’t change
b. Situation where parties pick the correct option – not knowing what the
other parties will do
c. Situation where one picks the correct option – knowing what the other
parties will do
d. Both parties know what the other will do so do nothing
e. None of the above
3. Oligopoly outcome is characterised by
a. Broad price rigidity
b. Lack of price volatility
c. Non-price competition
d. High levels of marketing and branding
e. a. and b.
f. a. to c.
g. All the above
4. The Prisoners’ Dilemma seeks to explain..
a. Why oligopolists change prices
b. Why oligopolistic firms engage in non-P competition
c. Why oligopolies tend to “do nothing” and it’s a good choice as it turns out
d. Why price wars happen
e. None of the above
5. Weakness of the kinked-D curve model is…
a. Impossible to see profit margins
b. Many possible MC = MR points
c. Hard to show the effects of a change in D
d. a. and b.
e. b. and c.
f. all the above
6. Oligopolists can create BTE by…
a. Raising prices
b. Decreasing supply
c. Collusion
d. High levels of spending on marketing
e. a. and b.
f. b. and c.
g. c. and d.
h. All the above
7. Teacher Appreciation Week starting on Monday, March 3rd.....here’s the
schedule…ONE of these was suggested by McGee; which?
a. Monday, we will have flowers delivered to each teacher's classroom
b. Tuesday, we will have a catered breakfast of cinnamon rolls and bagels in
the faculty lounge
c. Wednesday, we will have chocolates delivered to each teacher's classroom
d. Thursday, we will have a catered lunch from Geneva in the faculty lounge
e. Friday, we will do a special raffle where each teacher is entered for a great
prize!!!/
f. Happy Hour at the Red Wine Bar @ 4.00 p.m.
On macro (Mon 14 Apr 2014)
1. Money value of output is $120 mn….C is 20, Inv is 40, G is
30….so what is net exports?
a. O = E = Y
b. E = C + I + G + X – M
c. 120 = 20 + 40 + 30 + X – M
d. X – M (net X) = +30 (thus, X ˃ M by $30…so, a
trade surplus)
2. In t0, nominal GDP is 600 bn. In t1, nominal GDP is 630 and
inflation has been 5% during the past year. What is real
GDPreal in t1?
a. Answer: 600 bn!
b. Nominal means “sticker price” – unadjusted to a
base year value…e.g. not adjusted for i
c. GDPn has gone from 600 to 630…an increase in
5%
d. Infl is 5% - thus, the entire increase in GDPn is
from inflation! We have NOT produced more
goods…they just cost more.
e. Doing this correctly;
i. (GDPn at t1/price index at t1) x 100
ii. (630/105) x 100…or…630/1.05
3. In an economy, G = 25, I = 30, S = 25 and T = 20. What
might one conclude about the trade balance?
a. G + I + X = T + S + M
b. 25 + 30 + X = 20 + 25 + M
c. We do not know the values, but we know that M
˃ X by 10 – a trade deficit
4. A country such as the US will have GDP ˂ GNI because…
a. US has many MNCs abroad…
b. These subsidiaries will earn profits…
c. And these profits will be repatriated to the US!
This is called Property Income from Abroad (PYfA)
d. Foreign economies have plants/firms in the US…
e. These foreign subsidiaries will repatriate profits
out of the US – Property Income paid Abroad
(PYpA)
f. US has a GDP of $100
i. PYfA: $30
ii. PYpA: $20
iii. Net Property Income from Abroad
(NPYfA) = +10
iv. GNI = $110
5. t0; GDPnom = $100, pop = 50, price level = 100
t1; GDPnom = $110, pop = 55, price level = 105
What has happened to Yreal?
a. GDPn has ↑ by 10%....p.lev. has ↑ 5%...thus,
GDPr must have ↑
b. Calc: ($110/105) x 100…or $110/1.05 = $104.76
What has happened to Yr/capita?
c. [(Yn at t0/price index at t0) x 100] /pop at t0
i. $2.00
d. [(Yn at t1/price index at t1) x 100] /pop at t1
i. $1.90
6. The following happens: Shai wins USD1,000 in a
lottery…buys a plane ticket to Israel…the travel agent puts
the USD1,000 in the bank…the bank lends it to
Tiffany…who lends it to a mate who uses it to buy an ice
cream machine…the ice cream machine maker uses the
USD1,000 to pay off taxes…and govt uses the USD1,000 as
an unemployment benefit (= transfer payment…such as
social benefits) for Rintaro…who uses USD500 to buy
food. How much is GDP?
a. USD2,500
b. Asdf
7. Alt: a man has a mistress (he’s Italian) and pays her
USD6,000 per month. What happens to GDP in Italy when
he marries his mistress? Note: she performs the same
services but now as a wife.
In-class quiz on real and nominal
15 – 16 Apr 2014
1. The basket of goods used for the CPI costs €250,000 in 1995 and €300,000 in
2005.
a. What is the CPI for ’95 and ’05?
i. CPI95 : 100
ii. CPI05 : (300/250) x 100 = 120
b. What is the real price of a good that costs €50 in 2005?
i. (Pnom in 2005 / CPI in 2005) x 100…. €50/1.2 = €41.67
c. What is the real value of one Euro in 2005?
i. Real value of a Euro is €1/1.2 = €0.83
2. Between 2002 and 2003, inflation was 5%.
a. If the base year is 2002, what will the CPI be in 2003?
i. CPI03 is 105
b. If the base year is 2000 and the CPI was 110 in 2002, what is the CPI in
2003?
i. CPI03 : 110 x 1.05 = 115.5
3. A person’s wages are $5,000/month in 2001 and the CPI in 2001 is 145. Her wages
are $5,400 in 2005 and the CPI in 2005 is 156.
a. What has happened to her nominal wages? Calculate.
i. Increased by 8.00%
b. What has happened to her real wages? Calculate.
i. Nom wages have gone from $5,000 to $5,400
ii. During this period, the price level has increased by ((156 – 145 /
145) x 100) = 7.6%
iii. Thus, if the base year had been 2001 (CPI = 100) the CPI in 2002
would be 107.6
iv. Wreal = (Wnom in 2005 / CPI in 2005) x 100 → ($5,400 / 107.6) x
100 = $5,018
4. The following happens: Eric wins USD1,000 in a lottery…buys a plane ticket for
USD1,000 to HK…the travel agent puts the USD1,000 in the bank…the bank lends
it to Chris…who lends it to a mate who uses it to buy an ice cream machine…the
ice cream machine maker uses the USD1,000 to pay off taxes…and govt uses the
USD1,000 as an unemployment benefit (= transfer payment…such as social
benefits) for Carey…who uses USD500 to buy shoes. How much is GDP?
a. USD2,500
In-class quiz – Ch 36 – 40, Cristina’s (GDPr and AD)
23 Apr 2014
1. Explain how GDP is calculated using the income method. (3p)
a. GDP is money value of O/E/Y, 1p…sum wages+rent+interest+profit, 2p
2. Nick’s nominal wages goes from €15/hour to €16/hour during 2009. The CPI
during this period goes from 120 to 125. Explain to what extent Nick is better off
in terms of wages. (4p)
a. Increase in Wn is 6.67%, infl is 4.16% - his real wage has increased
b. CPI goes from 100 to 104.1, real wage is €16/1.041 = €15.37 – increased
c. Or: 15/1.2 compared to 16/1.25 – €12.5 → €12.8
d. Better off!
3. What are three possible weaknesses of comparing the GDP of France with the
GDP of China? (3p)
a. …income distr…exchange rates…what is produced…1p each
4. Explain why one might expect GNI to be greater than GDP for Holland. (3p)
a. GDP + NPYfA = GNI, 1p
b. Expl of NPYfA, 1p
c. Expl that NPYfA in Holland will be positive due to many MNCs operating
abroad and repatriating profit, 1p
5. Explain what aggregate demand (AD) is and why it is negatively correlated to the
price level (measured by the GDP deflator). (4p)
a. Sum of money value of exp, 1p
b. AD is E method of GDP, 1p
c. Real balance…real income…int’l subst effects, 2p
6. Think! Draw an AD curve showing the effect on an economy of an increase in the
price of imported goods. (3p)
a. M are neg in AD, 1p
b. ↑Pm → ↓ Qm → ↑ AD, 1p
c. Diag showing ↑ AD, 2p
End 08:25
In-class quiz – Ch 36 – 40, Sara’s (GDPr and AD)
23 Apr 2014
1. Explain how GDP is calculated using the output method. (3p)
a. Output as money value (1p), value added (1P), sum of value added (1p)
2. The nominal price of a cinema ticket goes from €5 to €6/hour over two years. The
CPI during this period goes from 120 to 125. Are movie-goers better or worse off?
(4p)
a. Rise in price is 5/120 = 4.16% (1p)
b. ...so the CPI goes from 100 to 104.1 (1p)
c. Pr = 6/1.041 = €5.76 (2p)
3. What are three possible weaknesses of comparing the GNI of France with the GNI
of China? (3p)
a. 1p for exchange rate…what is prod’d…Y distr…pop…NPYA…etc…
4. Explain why one might expect GNI to be smaller than GDP for Burkina Faso. (3p)
a. Def of GNI using NPYfA, 1p….that Burkina Faso will have more repatriated
profit going abroad than coming home, 1p….thus NPYfA is negative, 1p
5. Explain what aggregate demand (AD) is and why it is negatively correlated to the
price level (measured by the GDP deflator). (4p)
a. Sum of E, 1p…..e.g. GDP or Y, 1p….income, real balance and subst effect,
2p
6. Think! Using an AD curve, show the effect on an economy of a decrease in the
value of the currency. (3p)
a. If exchange rate ↓→ Px ↓ → Qx ↑ → ↑ AD (SHIFT)
b. …and/or; exchange rate ↓→ Pm ↑ → Qm↓ → ↑ AD (SHIFT)
End 14:00
In-class quiz – Ch 36 – 40, Chipmunk’s (GDPr and AD)
24 Apr 2014
1. Explain how GDP is calculated using the expenditure method. (3p)
a. GDP as money value of output, 1p. E = C + I + G+ X –M, 2p.
2. Average nominal wages go from €10 to €12/hour over two years. The CPI during
this period goes from 150 to 165. Are wage-earners better or worse off? (4p)
a. Wages increase by 12/10 → 20%, 1p. CPI ↑ by 15/150 → 10%, 1p. This
means that real wages have increased (1p) and wage earners are better
off, 1p. Any calculation such as indexing Wnom and then using the CPI to
adjust, up to 3p. (120/110 = 9.1% increase in real wages.)
3. What are three possible weaknesses of comparing the GDP of Homecon (made-up
country) over a period of 20 years? (3p)
a. Not shown what is produced…income distribution…effects on
environment…quality of goods…inflation not shown if this is GDPn…; 1p
for each with brief expl.
4. Explain why the GNI of Korea would be larger than GDP. (3p)
a. Korea has lots of MNCs, 1p, lots of PYfA flowing in, 1p, GNI = GDP + NPYfA,
1p
5. Explain what aggregate demand (AD) is and why it is negatively correlated to the
price level (measured by the GDP deflator). (4p)
a. AD as sum of value of all G/S, 1p….sum of all E in an economy,
1p…planned expenditure in an economy, 1p…slope is due to real income
effect & real balance effect and foreign subst effect; 2p
6. Think! Explain, using an AD curve, the effect on an economy of a huge increase in
government spending. (3p)
a. This will SHIFT the AD curve right – e.g. an increase in AD, 1p….increase Y,
1p….because G is a component of AD, 1p
End 10:25
In-class quiz (36 – 46) Chipmunk’s
23 May 2014 Time: 45 minutes.
1. a) Define aggregate demand. (2p)
Sum of planned expenditure (1p) in an economy during a period of time (1p)…alt
“sum” + “C + I…”
b) Define inflation. (2p)
Sustained rise in the general/average price level (1p) ….measured by the CPI/t (1p)
2. Explain, using a diagram, the effects on economic growth of an increase in the
rate of interest. (4p; 2p for diag and 2p for explanation)
Diag: AS-AD model showing decrease in AD (2p)
Expl: increased r will cause HHs to save more and borrow less → C ↓ → ↓ AD
(2p) …alt… ↑r → increased cost of borrowing for firms → ↓I → ↓AD
3. Explain, using a Keynesian AS-AD diagram, why an increase in government
spending might not increase the rate of growth. (4p; 2p for diag and 2p for
explanation)
Diag: AS-AD showing K model where AD is at the FE level of output, increased AD
is purely inflationary – no increase in Y
Expl: at FE level there are no avail factors and thus no correlation between higher
price level and real output,
4. Evaluate the consequences of economic growth. (8p)
Basic answer; define economic growth, explain ways it might be achieved (D-side
or S-side) and outline possible effects on stakeholders.
 Def of growth, 1p
 Expl that growth is via ↑AD and/or ↑AS , 2p


Clear and well-used diag to support iteration on trade-offs…etc,
up to 3p
Eval:
1. Trade-offs (i ↔ U, growth ↔ i…etc)
2. Winners and losers in growth (income distr…costs to govt
of G…etc)
3. Discussion along K ↔ mon/n-c lines (LR effects of D-side
policies…)
4. The poss ↑SoL, tax revenues…overall economic/societal
wellbeing due to growth
5. Anything reasonable and relevant!
In-class quiz – Ch 36 – 46, Cristina’s (GDPr and AD)
26 May 2014
1. a) Define “deflation”. (2p)
Falling average/general price level (1p)….continuous/consistent (1p)….unit of
time, usually one year (1p)…using CPI…(1p)
b) Define “real GDP”. (2p)
GDP adjusted for infl (1p)….GDP adjusted for infl by dividing GDPn with the GDP
deflator (2p)
2. Explain, using a diagram, how an increase in the interest rate would affect an
economy. (4p; 2p for diagram and 2p for explanation)
Diag: AS-AD model showing decrease in AD (2p)
Expl: increased r will cause HHs to save more and borrow less → C ↓ → ↓ AD
and thus lower GDP and poss defl (or falling inflation rate)
…alt… ↑r → increased cost of borrowing for firms → ↓I → ↓AD and thus lower
GDP and poss defl (or falling inflation rate) (2p)
3. Explain, using a diagram, how government could decrease rising inflation in an
economy. (4p; 2p for diagram and 2p for explanation)
Diag: AS-AD showing ↓AD, 2p
Expl: lower G and/or increased T and/or ↑r → REFER TO RELEVANT
COMPONENT(-s)→ ↓ AD and thus a decreased rate of infl (measured, in this
case, by the GDP defl), 2p
4. Evaluate the effects of an increase in government spending undertaken in order to
decrease the rate of unemployment. (8p; max 4 for no evaluation)
Basic issue: G is a component of AD so ↑G → ↑ AD and thus ↑ GDP (growth)
and ↓ U (ADL is derived from AD). However there are other issues such as infl, Y
distr issues, poss environmental effects…
EVAL: up to 4p for any well addressed issue done in evaluative depth
 Trade-offs: infl ↔ U…etc
 Winners and losers (effect on stakeholders): infl hits everybody,
nominal wages don’t change quickly
 Societal issues: infl erodes savings, G is in fact tax-payer money
 LR vs SR: poss that ↑infl means ↓AS in LR or that the higher
infl rate erodes int’l competitiveness
 Different schools of thought: issues in the K or mon/n-c model
when G is increased at the FE/NRU
 Any valid and well-reasoned issue!
End 09:30
In-class quiz – Ch 36 – 46, Sara’s (GDPr and AD)
26 May 2014
1. a) Define “aggregate expenditure”. (2p) ´
Sum of expenditure in an economy (1p)….C + I etc (1p)… during a period (1)
b) Define “GNI”. (2p)
GDP + NPYfA (1p), shows ownership of factors and not “where” (1p)
2. Explain, using a diagram, how a decrease in the interest rate might affect
unemployment in an economy. (4p; 2p for diagram and 2p for explanation)
Diag: AS-AD (or ASL.ADL) showing ↑AD
Expl: lower r means lower borrowing costs for firms and HHs → ↑I and C → ↑
AD and ↑ ADL → ↓U (for full 2p there must be clear answer to the U issue)
3. Explain, using a diagram, how government could increase the growth rate in an
economy. (4p; 2p for diagram and 2p for explanation)
Diag: AS-AD showing increase in AD – or increase in AS, 2p
Expl: Any fiscal/monetary policy used in D-side clearly linking the AD shift with
growth, 2p. Any S-side policy doing the same, 2p
4. Evaluate the effects of demand-side policies undertaken in order to increase the
rate of growth. (8p; max 4 for no evaluation)
Basic issue:
Eval:
End 15:00